Break Even Calculations

The Break Even conversations on most websites are very misleading. Most of the data
supplied seems to assume that the individuals donít care how they are living. So
what if they have to scrimp by on $5,000 less because they started their Social
Security as soon as they could. They do not consider that you will have to take
an extra $6,500 out of your IRA and pay an extra $1,500 in taxes to maintain the
standard of living, after tax income, which you desire!

This page will look at Break Even from two aspects; the gross benefits level that
you are getting from Social Security, and the net amount that you are getting from
the US Government, benefit income minus taxes given back!

Using the spreadsheet supplied with this website, here are a couple of examples of
individuals with various income levels. One decides to retire at age 62, the other at
age 66. The age 66 retiree will get more money each year, but gets zero for the first
4 years. At what age does the amount received become equal, the break even point.
How does the amount of taxes given back to the government effect this break even point
if both individuals want to live the at the same standard of living income level?

This is an
example of an individual with average working income was $60,000 who
wants to retire with an after federal tax income of $48,000. The first column
represents their required income if they retire at 62 and the last column
represents starting their SSB at age 66.

If you calculate the Break Even point where the individual is getting the same
gross income from their full GROSS Social Security benefits,
they will break even between ages 77 and 78.

But, in order to reach their desired $48,000 after Federal tax lifestyle, they would
have to withdrawal more of their savings from their IRA each year to make up for
the smaller SSB from age 62. This results in higher taxes. If you recalculate
their break even based on their NET income from Uncle Sam, SSB
minus Federal Taxes, their break even drops 4 years to between ages 73 and 74.

The reduction in taxable income also resulted on only 28.6% of the larger
Social Security benefit being taxed vs. 58.0% of the smaller benefit.

This $60,000 / $48,000 example does not involve "The Tax Hump". If we increase the income
and the desired standard of living to include interference from the tax hump, the Break Even
Gross vs Net differences become even more pronounced!

This is an
example of an individual with average working income was $80,000 who
wants to retire with an after federal tax income of $60,000. The first column
represents their required income if they retire at 62 and the last column
represents starting their SSB at age 66.

The Gross break even calculations of 77 and 78 do not change because the 100%
vs 75.42% age 62 ratio for their actual Social Security benefit did not change.

When you look at the graph, the solid green tick mark includes the entire solid
red Plan A tax hump. The dotted green What If tick mark includes only a small
portion of the purple tax hump. The solid and dotted after tax tick marks are on
top of each other and you can easily see the difference in the taxes paid. This
cause the break even point to drop an additional 2 years to age 71 and 72.

Larger benefits create larger Tax Humps, but they occur at higher gross income
levels, so they are easier to avoid with proper planning. Only 62.4% of the larger
benefit became taxable income vs. the maximum 85% of the smaller benefit.

These examples were only adjusted by the amount of Federal Taxes. There are 50 States
and over 3,000 counties all of which have their own individual tax laws. When you
consider the necessary additional taxable income required for the lower Social Security
benefits for age 62 retirement which will also create higher state and local taxes, the
break even ages for Net Income after ALL taxes is even lower.

As with just about everything else on this website, your Personal Tax Hump is based on
your personal Social Security benefit level based on your personal decision on when to
start your benefits. Your personal hump also depends on your personal choices on how
you saved for retirements and where your other income will be coming from.